FINANCIAL ANALYSIS FOR THE GAP, INC. ALL CHAPTERS

Assignment

Download and print the fiscal 2001 Annual Report for The Gap found in Doc Sharing. You must have Adobe Acrobat Reader 5.0 software to download the Annual Report. A free copy can be obtained from Adobe’s web site.
Note: the 2001 fiscal year is dated the 53 weeks ended 2/2/02 and the 2000 fiscal year is dated the 53 weeks ended 2/3/01. After reviewing the Gap, Inc. financial statements in their Annual Report,answer the following questions:

1. What is happening to The Gap’s net income over time-is it increasing or decreasing? By how much? Name the items (accounts) most responsible.

Response:

From the above we can see that Net Income of GAP is declining. The accounts which are responsible for decline in sales are as below:

• Cost of goods sold and occupancy expenses
• Depreciation and Amortization
• Interest Expense

At 2/2/02, how much total resources did The Gap have to work with? (see the Balance Sheet)

Response: As of 02-Feb-2002, total resources available to GAP to work with was $7,591,326

How much did The Gap owe?

Response: As of 02-Feb-2002, amount owed by GAP was $4,581,745

How much of its assets did the company’s stockholders actually own?

Response: As of 02-Feb-2002, shareholder’s equity of GAP was $3,009,581

Assignment

(3) Compute The Gap’s Current Ratio for fiscal 2000 and fiscal 2001 from the balance sheet in the Annual Report. (show your computations)

Response:

Assignment

(4) Compute The Gap’s Debt Ratio for fiscal 2000 and fiscal 2001 from the balance sheet in the Annual Report. (show your computations) Debt Ratio (fiscal 2000):

Response:

Debt Ratio (fiscal 2001):

Response:

(5) Are these ratios acceptable? How can you tell? What is the trend over time

Response:

GAP looks like an adequately levered firm. There has been increased in both assets and total liabilities. The debt ratio has moved up from 0.258 in 2000 to 0.264 in 2001. Overall we can say that there is no significant change in the debt ratio of GAP over the period.

(6) Place The Gap’s Current Ratio and Debt Ratio in the table below and comment on the comparison of The Gap to its competitors and to the industry.

Assignment

From the above comparison of current ratio and debt ratio of GAP with its competitors and Industry we can comment the following:
Current ratio of GAP is way less than the competitors and also of Industry. Moreover the current ratio of 1.48 for 2001 is way less than the standard current ratio of 2.
Debt ratio of GAP is lower than that of competitors. Since the debt ratio of the industry is not available we cannot comment on its comparison with Industry.

(7) Compute Gap’s Quick Ratio for fiscal 2000 and 2001. (show your computations).

Quick Ratio (fiscal 2000):

Response:

Quick Ratio (fiscal 2001):

Response:

What does this ratio say about The Gap’s ability to pay current liabilities? What is the trend of Gap’s Quick Ratio over time?

Response:

The standard quick ratio is 1. GAP has been maintaining quick ratio less than the set standard. In 2000 the quick ratio was only 0.27 which is very less, however, in 2001, the company have increased the ratio to 0.67 to improve the liquidity position as compared to 2000. Overall GAP’s ability to pay current liability is not very good.
GAP has been showing some improvement in quick ratio in 2001 as compared to 2001.

(8) Does The Gap have any Accounts Receivable?

Response:

No, GAP does not have any Accounts Receivable

Assignment

(9) Place The Gap’s Quick Ratio in the table below and comment on the comparison of The Gap to its competitors and to the industry.

The quick ratio maintained by GAP is lower than one of the competitor and higher than another competitor. Quick Ratio of GAP is less than that maintained by the Industry. The quick ratio of GAP is also less than the standard of 1. Overall we can say that GAP has been maintaining a lower quick ratio.
(10) Compute The Gap’s Gross Profit % for fiscal 2000 and 2001 (show your computations).

Response:

Gross Profit % (fiscal 2000):

Gross Profit % (fiscal 2001):

Response:

(11) Compute The Gap’s Inventory Turnover for 2000 and 2001 (show your computations).

Inventory Turnover (fiscal 2000):

Response:

Inventory Turnover (fiscal 2001):

Response:

Assignment

(12) What is the trend of The Gap’s Gross Profit % and Inventory Turnover over time? How does a company’s Inventory Turnover relate to its’ Gross Profit %?

Response:

There has been a reduction in the gross profit of GAP in the year 2001 as compared to 2000. The gross profit margin has also come down from 37% in 2000 to 30% in 2001. The inventory turnover ratio has have increased in the year 2001 as compared to 2000 marginally, which implies that GAP has been a little more efficient In 2001 as compared to 2001 as far as Inventory maintenance is concerned.

(13) Place The Gap’s Gross Profit % and Inventory Turnover in the table below and comment on the comparison of The Gap to its competitors and to the industry.

Comment:

From the above we can conclude the following:

• The gross Profit ratio of GAP has been lesser than both its competitor and also the Industry average
• The Inventory turnover ratio is lower than one of its competitor but is higher than the other competitor and also the Industry average
• Overall we may conclude that GAP is earning a lower gross profit but is maintain a inventory which is close to its competitor but lower than the Industry.

Assignment

(14) Explain the change in The Gap’s Property, Plant and Equipment from fiscal 2000 to fiscal 2001? Which accounts increased and why? Note: use the gross amounts (before accumulated depreciation is subtracted).

Response:

There has been a 20% increase in the property plant and Equipments of GAP in the year 2001 over its balance in 2000.

One of the most important reasons for increase in various components of fixed assets is increase in Store Concepts in the current year by 495. Since most of the stores are leased, any increase in number of store will have corresponding increase in Furniture and Leasehold Improvements.

(15) How much long-term debt did The Gap issue during the year ended 1/29/00? (See the financing activities section of the cash flow statement on page 29). Compare this amount to the amount of long-term debt issued in fiscal 2000 and 2001. What is the most likely explanation for the differences?

Response:

During the year ended Jan 29, 2000, GAP had issued Long Term Debts amounting to $311,839.
During the fiscal year 2000 the amount of long term debt raised was $250,000 and that for 2001 was $1,194,265.
One of the most important reason for increase in Long term debt in 2001 is the fact that GAP have opened 495 new store concepts and the same will require lot of investment in leasehold property and plant and equipment.

(16) Compute The Gap’s Rate of Return on Assets for fiscal 2000 and 2001. (show your computations)

Rate of Return on Assets (fiscal 2000):

Response:

Rate of Return on Assets (fiscal 2001):

Response:

(17) Compute The Gap’s Rate of Return on Equity for fiscal 2000 and 2001. (show your computations)

Rate of Return on Equity (fiscal 2000):

Response:

Rate of Return on Equity (fiscal 2001):

Response:

(18) Place The Gap’s Rate of Return on Assets and Rate of Return on Equity in the table below and comment on the comparison of The Gap to its competitors and to the industry.

Since GAP had suffered net loss in the year 2001, both return on Assets and Return on Equity is negative. Therefore, the returns of GAP are not comparable either to the competitor or to the industry.

Assignment

(19) Looking at The Gap’s Statement of Shareholders’ Equity, what was the main reason that The Gap’s Retained Earnings changed from fiscal 2000 to fiscal 2001? What was the main reason that The Gap’s Treasury Stock changed from fiscal 2000 to fiscal 2001?

Response:

From the above we can see that the main reason for change in retained earnings is payment of dividend during the year 2001.

From the above we can see that the main reason for change in treasury stock is the reissuance during the year 2001.

Assignment

(20) By how much did the company’s cash balance change during fiscal 2001? Fiscal 2000? Fiscal 1999?(see the Statement of Cash Flows)

Fiscal 2001- $626,955

Fiscal 2000- $(41,558)

Fiscal 1999- $(114,901)

(21) What type of activity (operating, investing or financing) contributed most to The Gap’s cash flow during fiscal 2001?

Response:

During the Fiscal year 2001, the highest amount of cash flow was contributed by Operating Activities

(22) List the two major investing activities (in terms of dollars) on The Gap’s fiscal 2001 statement of cash flows.

Response:

Two major investing activities in the cash flow statement for 2001 are as below:

• Net Purchase of Property plant and Equipment: $940,078
• Acquisition of lease rights and other assets: $10,549

(23) List the two major financing activities (in terms of dollars) on The Gap’s fiscal 2001 statement of cash flows.

Response:

Two major financing activities in the cash flow statement for 2001 are as below:

• Proceeds from issuance of long term debt: $1,194,265
• Net decrease in Notes payable: $734,927

Assignment

(24) Compute The Gap’s Free Cash Flow for fiscal 2001 (show your computations). Free Cash Flow (fiscal 2001):

Response:

The free cash flow for 2001 is as below:

(25) Compute the following ratios for The Gap for fiscal 2000 and 2001(show your computations).

Times Interest Earned (fiscal 2000):

Times Interest Earned (fiscal 2001):

Rate of Return on Sales (fiscal 2000):

Rate of Return on Sales (fiscal 2001):

Assignment

Earnings per Share (fiscal 2001):

Basic Earnings per Share: $(0.01)

Diluted Earnings per Share: ($0.01)

(26) Place The Gap’s Times Interest Earned, Rate of Return on Net Sales, Earnings per Share, Price-Earnings Ratio, and Dividend Yield ratios in the table below and comment on the comparison of The Gap to its ompetitors and to the industry.

From the above we can conclude the following:
GAP has a lower Times Interest Earned as compared to both competitors and Industry average.
Return on net sales for GAP is way lower than the competitors and the industry average. Net Income of GAP for the year 2001 is negative and therefore the return on sales is also negative.
Earnings per Share for GAP are way lower than the competitors and the industry average. Net Income of GAP for the year 2001 is negative and therefore the EPS is also negative.

(27) Prepare a horizontal and vertical analysis for The Gap on the Excel spreadsheets located in Document Sharing. Comment on any significant increases/decreases and vertical relationships.

Response:

Following are significant increase / decrease and vertical analysis:

• There is a significant change in the cost of goods sold and occupancy expenses. The same has increased substantially in the year 2001.
• Interest expense has increased by more than 50% in the year 2001 as compared to 2000.
• Earnings before Income tax has changes by 82% over 2000 number
• Net Income have changes from $877,497 in 2000 to $(7,764) in 2001
• Cash and cash Equivalent have increased by more than 150% in 2001 as compared to 2000
• Land and Buildings and Construction in Process have changes by close to 60% in 2001 as compared to 2000.
• Current Maturities of Long term debt is nil in 2001 from $250,000 in 2000, representing a 100% change.
• Long term debt has increased by more than 150% in 2001 as compared to 2000.
• Accumulated and comprehensive income has increased by 200% in 2001 as compared to 2000.

(28) After reviewing all the analysis in the answers to the Projects and other information contained in The Gap’s Annual Report, answer the following question, citing your reasoning.

Would you invest in The Gap? Why or why not?

Note: your answer must be 2 pages in length and you must cite the results of the previous questions, including ratio, horizontal, and vertical anlysis to support your opinion. You will be graded on the support for your opinion, not your opinion itself.

There is no correct response to this question. This question will be graded on how well you interpreted the meaning of the ratios and how well you supported your answer.

Response:

Every investor will look for certain important characteristics before making any investment. Some of these characteristics are as below:

Sustainable competitive advantage: Investors focus on companies which are developing innovative products and services with demonstrable competitive advantages that are not easily duplicated by competitors and that provide an immediate tangible value to customers. Moreover, the company should also perform in standard with the competitors and Industry. Since GAP has performed very poorly as compared to the competitors and also to Industry standard in most of the performance measures, it will not be advisable to invest in GAP. Let us see how GAP has performed as compared to competitive firms and Industry Standard.

From the above analysis we can see that GAP does not have competitive advantage neither over its competitors nor its industry standard.

Growth: Any investor will like to invest in company which shows a very good growth rate year over year. By analyzing the financial statements of GAP we can see that the growth rate has been detoriating over the period.

From the above we can see that the performance of GAP in the year 2001 has gone worse when compared to the performance of 2000. Therefore, there is a negative growth in GAP and therefore any investment made in this company will not be a wise decision.

From the above stock price chart we can see that the stock has given negative return to the investors over a period of two years. This stock price performance will be very discouraging to making any investment in GAP.Therefore, we can conclude that it will not be a wise decision to invest in GAP